How to Set SMART Personal Financial Goals
Changing the Way You Spend Can Make You Richer
All the goals you come up with, long-term, medium-term, and short-term, must have some characteristics to enable efficient personal financial planning. These essential characteristics can be summarized in the acronym SMART.
S = Specific
M = Measurable
A = Attainable
R = Realistic
T = Timely
Characteristics of SMART Goals
A SMART goal must be:
Specific – state exactly what you want to achieve, why it is important, and how you are going to do it. Example of a goal that is too general: “I want to decrease my debt”. A specific goal would say: “I want to eliminate my credit card debt by negotiating a pay plan with the creditors and applying the money from my second job toward it”.
Measurable – assign a specific value to your goal, and establish clear criteria for measuring your progress. It must be evident when you have achieved it and by how much. Too general: “I will pay off most of my debt as soon as possible”. Measurable: “I will pay off $1,000 of my credit card debt in the next 4 months”.
Attainable – make your goals reasonable to achieve using the skills and resources that you have available. A good goal will require you to stretch slightly, but you need to feel that you can do it, or you won’t commit to it. Non reasonable: “I will be a millionaire in 2 years”. Attainable: “I will save $2,000 in a year saving $6 a day”.
Realistic – set goals that are doable and you can reasonably accomplish. Don’t ignore your limitations, choosing goals too difficult to attain sets you up for failure. But don’t set the bar too low; make sure they require some effort, but within reach. To be realistic, you need to have the skills and the time to gather the resources and skills needed. Unrealistic: “By managing my finances well, next year I’ll be debt free, and have saved enough to cover my kids’ college”. Realistic: “By managing my money better in three years I’ll be debt free and have an emergency fund of $7,500, three times my monthly expenses”.
Timely – Set a time-frame. A time limit will urge you to start saving now and be consistent. Time must be measurable, attainable and realistic.
The big secret in life is that there is no big secret. Whatever your goal, you can get there if you're willing to work.— Oprah Winfrey
How to Set SMART Financial Goals
Go through the brainstorming list below and edit each goal to fulfill the requirement below. This is also the moment to decide timing for each goal, and to delete from the list any redundant or way out of your reach goals.
4-Step Guideline for Financial Goal Brainstorming
Jot down ideas of things you and your family would like to do and/or purchase in your near and far future—don’t worry too much about feasibility. The beauty of brainstorming is that any idea is a good idea. Write down all that you’d like to do. The weeding and prioritizing will come later.
First, think far ahead to the things that you’d like to do 10-20 years from now. What would make you feel good and accomplished in the long term? Pay off your home? Retire early? Buy a vacation home? Travel?
Next, think of a shorter time (approximately three to five years) based on where you are now. What are the things you want to do in the medium time range of the next few years? Saving for college? Emergency fund? Eliminate debt? Buy a house? Buy a vehicle?
3. Short Term
Now start thinking of a closer time frame—like one year from now. List all the plans you may already have, and the things that you’d like to start within one year. Take a vacation? Buy an appliance? Pay off your credit card? Buy an instrument? Take classes?
4. Immediate Future
You are now ready for thinking 90 days ahead or closer. What are your short-term goals? Start saving on 401K or Roth-IRA or increasing your contribution percentage? Taking advantage of a business opportunity? Gifts? New TV? Fancy shoes?
How to Achieve Your Financial Goals
For every financial goal, you need to write a saving plan.
For example, if your goals are like in the table below, you need to start saving a total of $443/month, and you need to start now.
Table: How Much Should You Save Monthly for Each Goal?
Required Monthly Savings
Buy new shoes
To be able to save $443 every month, and the example is only considering three goals, you may have to make major changes to your spending habits and the way you allot your money.
If the amount you have to save monthly toward your goals is way out of your reach, than you have to start over and re-prioritize your goals, reassessing how much you budget for each one, and the timing for accomplishment. For example, your vacation may have to be cheaper or it might have to wait longer.
Our plans miscarry because they have no aim. When a man does not know what harbor he is making for, no wind is the right wind.— Seneca
Purpose of Setting Financial Goals
The difference between successful and ineffective money management dwells in knowing what you want to accomplish and finding the right way to do it.
Only setting great financial goals and planning your finances smartly you can have a chance to make the most of your money and fulfill your ambitions.
Before you can set your financial goals, you need to have a personal budget. A budget provides you with a clear picture of where you money goes every month, how much you save, and how much you spend. It provides the knowledge necessary to decide what needs to be cut and what can be improved.
Once you have a personal budget, you are ready to sit down and plan a strategy for your spending and saving, in order to get successfully where you want to be, which is a richer place. If you are not sure how to budget take a look at this article that talks about how to get started budgeting with a simple approach and provides a sample spreadsheet to get started.
How to Set Financial Goals: The SMART System
The secret to setting personal financial goals is foreseeing your future needs and aspirations.
We all have dreams and wishes. To be able to plan your assets, you need to recognize both what you want and what you need to achieve in your future.
Following the SMART system for goal setting you can make your goals clear and easy to track. A smart goal has some characteristics associated with it: a dollar value, a time frame, and it must be measurable.
Think about your dearest desires and wishes and put them on paper. Brainstorming can be lots of fun. The resulting list will show what you really would like to accomplish in your lifetime. In order to set successful goals, it’s crucial that you anticipate your options, write them down, and make them smart.
Most likely you won’t be able to undertake all of the goals on your list, or not all immediately, so you need to look at your list and prioritize it, making your most important goals top priority, the ones on which you need to start acting now.
How Can You Save Today?
Pay Yourself First—You Are Your Top Priority
Stash the money away at the beginning of each month, right after pay-day. Don’t wait until the end of the month to save, sometimes sticking to a budget for everyday expenses can get really challenging, and you end up with not enough money available to fund your goals.
- Transfer your savings from your checking account into a saving or money market account.
- Commit to not using that money for other reason than what it’s meant for. It might be a good idea to establish different saving accounts for each goal, and label them accordingly. Many banks let you nickname your accounts.
Life has interesting ways of being unpredictable, and emergencies happen. A car that breaks down, someone gets sick, or an appliance that fails.
Emergency situations, that unresolved would create a safety or health hazard for your family, should be the only cases when you can spend your savings that were earmarked for specific goals.
When extra expenses whack you plan, take care of the necessities, then review and adjust the plan.
Look at the bright side: you used your vacation fund to fix the car. Yes, that’s unfortunate, but if you did not have a vacation fund, you would have borrowed that money and paid big interest on it, and still had no vacation fund.
By the way, an emergency fund should have top priority among your goals.
Track Your Progress: Are You Reaching Your Goals?
Once you have a plan on how much to spend, and how much to save each month, you’ve got to track how your plan develops.
It can be difficult to be motivated by far away goals. It might even be hard to envision them. What do I want to do in 20 years? I don't even know what I'm going to do tomorrow! Breaking down the process in 3-month periods makes it easier to envision where you want to be and what you wish to accomplish.
Create a progress report and see how you are doing every 90 days. Tracking your progress is a great motivator that keeps you going. It doesn’t have to be fancy. A chart like the table below will do.
Every three months look at each financial goal and see how you are doing as far as working toward its achievement. Are you on track? Have you accomplished even more than you expected? Are you far behind? Some goals will need to be revised, and adjusted.
Check Your Progress Every 90 Days
Saved so far
Buy new shoes
Keep It Flexible
Review your plan for long-term goals, and keep in mind that it is supposed to be flexible and you are going to review it every 90 days. There is no reason to be intimidated by long-term planning. Breaking down the process in 3-month periods makes it easier to handle long-term savings commitment and provide a certain degree of flexibility.
Saving Is a Family Business
Make sure that you involve every family member in the process of setting financial goals.
Being part of the goal and decision making will make it easier for everyone to stick to the plan and accept the sacrifices that may come out as consequences.
For example, if saving for an emergency fund means no more movies and popcorn on weekends, it’s much easier for the kids to accept that if you explain why your goal is so important, and the reasons for the changes. You’ll be surprised at how understanding and willing to help most children will be.
Are You Living in a Very Expensive Area?
Some cities have a much lower cost of living than others. If you are considering a change of job, you may to think outside the box and look in places where life is cheaper.
Most Affordable Big Cities in the U.S.
Median Household Income
Average Home Price
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2012 Robie Benve